$100/b oil: so near, yet still so far | Fuel for Thought

Oil industry leaders walked away from the Asia Pacific Petroleum Conference in Singapore last week assured that crude’s bull run is here to stay, but many are now wondering if a return to $100 a barrel could happen even sooner than the market anticipated just a few months ago.

The view from APPEC delegates were unanimous: A cocktail of production woes, US sanctions on Iran, production constraints and an inventory squeeze may be enough to push oil closer to the three-figure mark last seen four years ago.

ICE Brent crude futures hit $100/b for the first time in Q1 2008 and then went on to climb to a record near $147/b in the same year in July. The last time oil was above $100/b was in September 2014.

Mercuria co-founder and president Daniel Jaeggi’s remarks that the market may have to brace for substantial volatility in the fourth quarter this year set the tone for the debate that found support from other speakers and industry thought leaders at the S&P Global Platts event.

“I think we may well be on the verge of some very significant volatility here in Q4 2018 because depending on the severity and the duration of the Iranian sanctions, the market simply does not have an adequate supply response for 2 million b/d of oil disappearing from the market,” Jaeggi told the conference.

Jaeggi’s surprising forecast that 2 million b/d would disappear from the market because of sanctions on Iran is the highest estimate so far. Recent estimates call for a relatively lower number. Platts Analytics predicts 1.7 million b/d from Iran will come off the market in November.

“It is conceivable to see oil north of $100/b,” Jaeggi said.

OIL'S STRENGTHENING

Trafigura said in a presentation at the conference it is entirely plausible to see oil at $90/b by Christmas and at $100/b in the new year.

Separately, Japan’s MUFG Bank said global oil prices could return to $100/b in the short-term as OPEC’s ability to pump more oil to balance the market is tested amid complex supply ride risks. It blamed “limited maneuverability” by OPEC and its key producer allies to offset “a multifaceted set of geopolitical and/or unplanned supply outages.”

Last week Standard Chartered bank’s head of commodities research, Paul Horsnell, said sanctions against Iran could contribute to a “nasty gap” in the market at the end of the year, with oil prices potentially reaching $100/b, but probably not for a prolonged period.

While talk of $100/b oilstarted making its rounds in the market last week, lifting crude prices to levels last seen in 2014, there are analysts, such as Goldman Sachs, who feel there needs to be another strong driver to give crude the final push it needs to reach triple digits and “meaningfully break to the upside.”

Goldman Sachs said output from other OPEC producers and Russia will offset losses out of Iran. It expects Brent prices to stabilize back in the $70-$80/b range into the year-end.

Energy Aspects expect Brent crude to average $87 a barrel in Q4 2018. For the whole of 2019, it expects oil to average to $94/b, with prices climbing to $104/b only in Q4 2019.

Facts Global Energy expects Dated Brent to hover around $81/b by December, and a similar level is expected as an average for 2019. However, if US presses hard for zero exports, upside risks are higher. FGE identifies more upside risks for crude prices than downside risks at this juncture, given a tight spare capacity in the coming quarters.

OUTPUT CONCERNS

On the production side, one key question the market is looking for an answer to is to what extent Saudi Arabia might be able to fill the Iran vacuum.

At an OPEC and non-OPEC monitoring committee meeting in Algiers recently, Saudi energy minister Khalid al-Falih insisted the kingdom stood ready to meet any customer requests for crude.

Saudi Arabia has touted its ability to pump 1.5 million b/d above its current output of about 10.4 million b/d. But market watchers doubt the country has the full amount of its claimed spare capacity actually available, casting uncertainty on whether OPEC’s largest producer can prevent a price spike, as it has never produced above 10.7 million b/d.

In addition, US crude production has also recently seen its own bullish indicators toward oil prices. US commercial crude inventories were estimated to have fallen by 2.2 million barrels during the week ended September 21, according to a number of analysts surveyed by Platts.

Adding to the bullish tone, Keisuke Sadamori, International Energy Agency director for energy markets, told Platts at APPEC that sanctions against Iran, a continuing decline in Venezuelan production and possible disruption in supplies from countries like Libya would create challenges toward the end of the year, even though the market is currently in balance.